1. Consider a Specific Factors model with two countries: the UK and Australia; two sectors: cars (C) and sheep (S), and; three factors: capital (K), labor (L) and land (T). Suppose that capital is specific to the car sector, the land is specific to the sheep sector and labor is perfectly mobile between sectors.

1. Suppose that the UK and Australia have the same endowment so capita, land labor, but that Australia has more land than the UK. What will be the pattern of trade between the UK and Australia? Explain your answer with a diagram.

2. Now suppose that the UK is a small economy that takes the world prices of cars and sheep as given. Suppose the UK labor endowment increases. What effect does this have on the nominal and real wage in the UK? Explain your answer with a diagram.

3. Continue to assume that the UK is a small economy that takes world prices as given. Suppose the world price of cars increases. How does this affect the real price of capital in the UK? Explain.

4. Does the Specific Factors model predict factor price equalization across countries? Explain your answer with a diagram.